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Bubble, Boom Or Froth?

Image by placenamehere via FlickrFred Wilson has been calling it a bubble. John Doerr says it's a boom. And that's just two guys, although high flying, legendary types. I think what we are seeing is a froth. Let me explain.

A bubble is something waiting to burst. As soon as people wake up, they hunker down, and then where are you? The whole thing collapses like a ponzi scheme. There are some bubble aspects to what is going on. Do you think all startups that are getting funded will grow the money for their investors? That has never happened. Even a seasoned VC like Fred assumes one third of his investments will go down. But are too many flaky companies getting funded? The question is are more than the usual number of empty shell startups getting funded?

That is partly true. The recession is over. And so people are out and about buying. Angel investing is done by rich people who want to get filthy rich, but themselves are not entrepreneurs or inventors or otherwise geniuses. I do think the failure rate will be higher than usual for the current class of startups. So Fred is partly true. Where I disagree with him is - and I hope I am reading him right - with the suggestion that what is going on is largely unhealthy. Another collapse is imminent.

A boom on the other hand is too optimistic. John Doerr thinks the good times are here now, and here to stay. I do agree with the here to stay part. I think we are experiencing the first year of a decade that will be up and up. And by decade I don't mean 10 years necessarily. I don't know how long. But it will be in the seven, eight, nine years range. Small bubbles will burst along the way. But we will not see a total collapse - an apocalypse like the nuclear winter or the Great Recession - anytime soon.

But I do feel like John Doerr is painting too rosy a picture. If you had his portfolio, you would be too. I mean. I am not sure John Doerr sees the level of startup action that Fred Wilson does. So Fred's assessment might be closer to the ground. And in Fred's world a failure rate that exceeds 33% is bad. A failure rate of 66%, well, that's a bubble. I am not sure it is.

You can tell fake startups from the real startups. A real startup is futuristic. It promises and delivers a product or service that did not exist, and it has plans to make actual money. A total focus on eyeballs and page hits created the nuclear winter. A total focus on how many times your app got downloaded would be the equivalent today.

A business makes money. You got to make money. Not right away perhaps, but ultimately.

What we are seeing, in my opinion, is not a bubble, or a boom, but a froth. Capitalism's wheels are turning. And the next big things are being created. The action is for real, and it will lead to collective goods. But there will be plenty of failures and dashed hopes, thwarted dreams, lost fortunes. But the action will go on. We are at the beginning.

Web tech is seeing a lot of action. It is because it has become so much less costly to start a web tech company. Hopefully some of the culture will percolate to other sectors of the economy. A nanotech bubble would be nice, clean tech, bio tech bubbles would be nice. I am personally hoping for a microfinance bubble. Each new industry in history has created bubbles.

And I hope we are seeing the beginning of an economic boom. I hope not just tech, but the entire economy is being lifted up. I hope the folks in Washington DC get to work and bring the unemployment rates down.

So I think it is a froth, I wish bubbles in new sectors, and I wish a boom upon the entire economy.

Fred Wilson: Pacing Yourself: I've been pretty clear as of late that I think the market for investing in web startups is getting overheated. When I talk to some people about this, they say "you should shut down and ride out the bubble on the beach." To which I say "we don't think we can time markets."